  
|
|||
|
Whiskey, or Gold?Rick Ackerman
Judging from the mail I've received recently, some of you are not taking my deflation warning lightly. Of course, to mainstream commentators, we're just lunatics. But let me say it again: Deflation is unavoidable. And hey, don't shoot me, I'm only the messenger. I'll be publishing your letters on this topic over the next few days, and there are some good ones. We'll start today with a salt-and-pepper pair, the first from an "E. Overton," who has bucked the consensus with a rebuke to gold bugs: "Dear Dr. Goldfinger," he writes, tipping his hand early in this letter. "I can't help but think you're promoting a gloom-n-doom scenario so you can unload your gold. Your whole scenario doesn't mean squat for the majority in this country; i.e. middle class and poor people. If the whole system collapses, you'd better hope that bullion is fungible to buy your security, because we've already gotten a glimpse of survival mode, aka...New Orleans. Under that scenario, you'd probably hope that bullion could get you and your family to a foreign land to begin anew amongst fellow bullion holders. "Why waste time pondering an apocalyptic collapse of the financial system, as the odds are off the charts. Maybe the market will have a deep correction for a few days or a week, maybe even zig-zagging its way down over many months? Yep, but it will stabilize and over time, reward the risk takers. There is no birthright to a life of ease and luxury, in case anyone forget. Hardship and adversity is what spurs growth. Never has mankind been in total agreement on anything, and I don't believe for a minute that all players in the global markets are going to want to cash in their chips all at the same time. If necessary, the rules will be changed to ensure that the game doesn't end. The trick is to ensure a rule change will not wipe you out, so that you can still play while sipping a nice Sonoma and toking on your favorite Cohiba.
"Most folks have heard that Buffett and Soros were short the dollar (though I haven't personally verified it), but who knows how their "trades" were structured. What currency did they short against, was it a hedge or just some diversification in a mega-billion portfolio? What timeframe are their "trades" on? Maybe they sold dollars to buy a foreign asset that they then used as leverage to go long the energy markets. Who the hell knows? I wouldn't have the balls to bet against them for any length of time. But getting long the dollar wasn't hard to see. The whole world seemed bearish while the Fed had said to expect continuing interest rate hikes. The easy money in the carry trade via the dollar gig was/is about over for now. Timeframe vs. leverage * risk * probability = solvency; or something like that. I'm amazed at those who "believe" in the Yen or Euro for more than anything but a short term vehicle for trading / speculation. "I think in trying to apply logic to the markets, you need to define a timeframe as they can remain illogical longer than most can remain solvent. It's all about perception. My take is that now we've entered the era of true global economics (thanks to technology) and are intertwined with our fiat currencies it's a game of musical chairs setting the stage for a one world order. This could easily drag on for another 100+ years. That can't be anymore ludicrous than "perceiving" bullion to be the golden angel to save you after a tidal wave washes away Wall Street. Smell the Roses I'll pass on the gold and take my chances of survival with the pot-bellied still and great grandpa's mash recipe. No worries on the fungibility of a hogshead of 'Kill-Devil'. Anyway, best of luck and I highly recommend you get out and smell the roses as we're all only one heartbeat away from death and there are no individual promises for a tomorrow." Thanks for your words of wisdom, Mr. Overton. The world's going to need all the optimists it can round up once deflation has run its course, and I'm heartened to see that you'll be up to the task. The second letter is from a well-known media personality who has requested anonymity. He is the kind of guy one should like to have on one's side in an argument about the state of the economy: Group-Think "I applaud your ability to maintain original thought in this market. I have been stunned by the pockets of group-think, or clique-think is perhaps a better term. Those warning of inflationary pressures; either monetary or demand driven, increasing are doing so without offering any empirical, anecdotal or historical precedence. They claim money supply is increasing but disregard the fact that the growth rate of money supply has been falling for 2-3 years depending on how you measure it. "At no time since the 1950's has a multi-year decline in the rate of growth of money supply not been followed by a recession. They point to the fact that consumer spending, i.e. demand, has been increasing, but again fail to acknowledge that its rate of growth has been declining. There seems to be a complete misunderstanding of what inflation is and more importantly what it isn't. Maybe the growth rate of money supply will reverse and increase again just as the [Baltic Dry Index] did earlier this year. But, that is like trying to catch a falling knife; it's a gamble. There is no way to logically arrive at the conclusion that the most probable course of action from here is for there to be an increase in that rate of private money supply creation -- i.e., banks creating money faster than the fed destroys it. The trend is down. All historical precedence mandates that that trend is the most probable cyclical course; i.e. deflationary pressures mounting and inflationary pressures waning. Just Ignorance? "None of this is rocket science. I am perplexed as to why so many public prognosticators are willing to ignore this. Are they really as ignorant as they sound? Are they simply trying to dumb down a message to a conclusion they want to see? Are they selling their book? There are clearly many parts of this economy that are very new and make determining these things very difficult. But, the ones I am hearing are not claiming new economy and new macro rules. They aren't claiming any rationale at all." "Speaking of the potential for a U.S. recession, there are more recessions and bear markets during secular bear market eras than during secular bull market eras of sustained growth. During secular growth eras, bear markets are periods of consolidation, setting the stage for further growth. During secular bear periods, the increased frequency of bear markets reflect continuing corrections to misallocation of savings that occurred during the secular growth era. That the Fed pushed rates to excessively low levels in response to The Crash (natural correction to gross misallocation during the '90s bubble) and 9/11 merely increased the misallocation from stocks (and related investment and consumption) to property (housing stock), requiring perhaps an even larger "correction" and/or protracted period of underperformance of real estate and related sectors, e.g., durables, consumer discretionary, etc. Test Is Coming "That secular bear market eras contain an increasing number of bear markets and recessions than secular bull periods suggests that there is the risk that analysts, businesspersons, money managers, and policy makers are unprepared for the increase in the likelihood of rising volatility of the business cycle and stock prices going forward. We are likely about to test this supposition in the months / quarters ahead. "At least some in China perceive a risk of a global slowdown, as there was a rout from Asia last week - i.e., hot money outflows as the dollar continues to rise. I suspect that if this trend continues, there is an Asian Crisis II waiting in the wings. If hot money outflows from Asia back to the US / dollar continue, US supranationals will likely follow, repatriating profits / investments back "home" (Caribbean banks, not the US http://www.ustreas.gov/tic/mfh.txt ) for a time (or longer if a recession strains US-China relations with respect to Japan, Taiwan, Iran, China's efforts to secure oil supplies in Africa and Latin America, and so on), boosting the dollar further (or preventing / slowing a further immediate decline) and coinciding with a cyclical correction to commodities prices (dollar at par, gold below $400, oil at $45), narrowing of the US trade deficit (from falling energy and import prices and falling imports), and forcing the savings rate higher. Which sets the stage for that process to self-validate. "At any rate, I'll stop here. I'm not lecturing you, I just like to walk through a thought process in writing." Thanks for fleshing out my strong-dollar scenario with a hypothetical sequence of events that probably few expect. In fact, even I would never go so far as to imagine the shrinking of America's trade deficit as part of the process. But stranger things have happened. From the mail-bag tomorrow: "Will the general populace turn to gold?" *** Taming the Mini-Futures Trading the S&P futures with a stop-loss of one point or less? Come visit our archives to see how it's done. You can get a free one-day pass to visit the site, or a two-week trial subscription with no risk, by clicking here. Rick Ackerman *** 321gold Inc |
